> In October 2019, the exchange rate between the Cuban Peso and the Euro was 1.10 Peso per Euro. Over the year, Cuban inflation was 5.7% and European Union inflation was 0.8%. If purchasing power parity holds, what should the exchange rate Euro per Cuban Peso be in October 2020? (0.008 – .057) * + 1.1 1.1 = 0.8645 1. Expected change in exchange rate ASɛ/p = (lg – Ip)SE = (0.008 – 0.057) * (÷) = -0.0445 %3D P 2. New Sɛ/p = old SE/p + ASe/p = () + (0.008 – 0.057) * () = 0.86 E /P 1.1,
> In October 2019, the exchange rate between the Cuban Peso and the Euro was 1.10 Peso per Euro. Over the year, Cuban inflation was 5.7% and European Union inflation was 0.8%. If purchasing power parity holds, what should the exchange rate Euro per Cuban Peso be in October 2020? (0.008 – .057) * + 1.1 1.1 = 0.8645 1. Expected change in exchange rate ASɛ/p = (lg – Ip)SE = (0.008 – 0.057) * (÷) = -0.0445 %3D P 2. New Sɛ/p = old SE/p + ASe/p = () + (0.008 – 0.057) * () = 0.86 E /P 1.1,
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Hello, how does the formula represented in my first image get to the solution form in the second image? I guess its the algebra portion of the problem which I do not quite understand. Also, why in the solution we multiply times 1/1.1 and then add it? The longer your explanation through the solution the better for me, thanks.
Transcribed Image Text:ASUS/S
iys – is = IPus – IPs =
%3D
%3D
-
SUs/S
. ius (is) = Interest rate in the United States (foreign country)
· IPus (IPs) = Inflation rate in the United States (foreign country)
· RFR= Real risk-free rate (or rates of time preference)
= the spot exchange rate of U.S. dollars per unit of foreign currency
Sus/s
Transcribed Image Text:> In October 2019, the exchange rate between the Cuban Peso and
the Euro was 1.10 Peso per Euro. Over the year, Cuban inflation
was 5.7% and European Union inflation was 0.8%. If purchasing
power parity holds, what should the exchange rate Euro per
Cuban Peso be in October 2020?
1
+
1.1
(0.008 – .057)
= 0.8645
-
1.1
1. Expected change in exchange rate
ASE/p = (Ig – Ip)SE
(0.008 – 0.057) *
-0.0445
-
2. New SE/P
= old SE/p + ASE /P =
G) + (0.008 – 0.057) * () = 0.86 E /P
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